ISLAMABAD, Oct 22: The SECP held consultations with the three stock exchanges on Wednesday night, paving the way for a Rs 50 billion package for the equity market, aimed at providing ‘comfort’ to foreign investors and a ‘soft landing’ to the market after the proposed removal of the ‘floor’ on Oct 27.

The Karachi Stock Exchange had put a floor under the index level of 9,144 points on Aug 28 to halt a free fall after the market had lost 41 per cent in four months.

The regulators on Wednesday approved a Rs20 billion market support fund, which would invest in seven giant state-owned entities to save their stock values from nosediving.

A late night statement on Wednesday by the SECP said chairman Razi-ur-Rehman briefed participants (board of directors of the three stock exchanges) on the modalities of the new Rs20 billion open-end fund being set up by the government. It would be managed by NIT.

“The SECP today gave the formal approval for establishing the required fund”, the regulator’s statement said, adding that the NIT was in the process of finalising details for a smooth operation.

The fund would invest in seven state-owned entities -- Oil and Gas Development Corporation, Kot Addu Power Company, Pakistan Petroleum Limited, Sui Southern Gas Company, Sui Northern Gas Pipelines Limited, Pakistan State Oil Company and the National Bank.

The SECP observed that in addition to the market operation, the fund was being provided with a Rs 30 billion government guarantee to enable it to write ‘put options’ on the seven entities.

A technical adviser was being appointed to advise NIT on pricing the ‘put option’. The facility would be available to foreigners who were on investors’ list on Aug 27.

Sources told Dawn that foreign investment in the stock market was currently valued at $2billion and brokers and traders feared that foreigners could pull back their portfolio investment to the tune of $400million once the floor was removed.

The guarantee of Rs30 billion had been provided to foreign investors to give them the comfort of reimbursement of their loss in case stocks fell below the ‘floor’ in one year.

The offshore investors were at liberty to sell their stocks if they fetched considerably higher prices during the year.

The SECP stated that participants of the meeting, considering a proposal made by 103 members of the KSE for the closure of CFS market, were of a consensus that the CFS market should not be discontinued immediately to avoid any ensuing liquidity crises and until there were alternative products available in the market.

“It was unanimously agreed that the risk management of the product be further improved to remove the negatives that still exist in the system,” the regulator said.

In order to further strengthen the CFS and deliverable futures market and to reduce the risk therein the a number of additional risk management measures were proposed to be adopted with effect from Oct 27 in order to plug loopholes before opening of the markets.

The meeting also accepted a number of other proposals: strict compliance of mandatory collection of VaR-based margin by the brokers from clients in each markets effective from Oct 27; implementation of “new capital adequacy regime” with effect from Jan 1,; uncapping of “investor protection fund” at KSE effective October 27, 2008; transfer of risk management from the stock exchanges to the National Clearing Company of Pakistan Limited with effect from Dec 1, 2008; and regular bi-weekly reports to be submitted by the exchanges to the SECP in respect of regulatory compliance, compliance with risk management requirements and monitoring and surveillance effective from Nov 17.

The Fund building by the SECP comes on top of the several confidence building measures announced by the State Bank of Pakistan earlier in the week.

The KSE is currently in a state of limbo, showing a negligible three points decline on Wednesday and the historic low volume of just 123,600 shares. Average turnover in the 12 months prior to the current market turmoil was in the region of 185 million shares a day.